Watching your investments get cut in half by 50% is by no means fun. Many of us have vivid memories of what took place in 2008, watching assets all across the board collapse. This is something I don’t think any of us want to go through again, with many investors experiencing the worst case scenario of buying stocks at their highs and selling at their lows.
The big question now is what to expect in fall of 2015. Historically, October tends to bring around dicey markets that stir uncertainty. 2015 has been a year of great concern in the markets due to fundamental reasons, as well as even some conspiratorial ones. With the stock market entering overvalued territories, government debt spiraling out of control, interest rates at all-time lows, and an economy exhausting the bubble phase of easy money, fundamentally, there is great concern for a correction — and potentially even a collapse — which is arguably happening now.
One thing that everyone needs to realize is that no one can predict what exactly is going to happen with stocks, bonds, currencies, and other markets. Sure, people can make inferences and make educated guesses on what could happen, but there is no way to make exact accurate predictions about the future.
What I do see happening now is the fear of a market crash causing people to sell and panic. In addition to the fundamentals for a collapse, if you add in all of the conspiracy that is currently circulating, there is no wonder why the markets are so volatile. We have a self-fulfilling prophecy taking place, where people are panicking and causing stocks to fall. The question will be if the Fed and/or government has enough ammo in their Keynesian agenda to continue to hold everything together, or will this be the final nail in the coffin?
Today, I want to address the deflation scenario playing out. Harry Dent is known for his work regarding his deflation predictions. He has been quoted saying that the Dow Jones could fall down to as low as 3,500, with his main premise being the baby boomers retiring and spending less. This is what he sees being the straw that breaks the camel’s back, with spending falling off a cliff and a slowdown that will send shockwaves through the markets. He concludes that we are going to see a major event when the whole economy de-leverages and asset prices fall across the board, including precious metals, with people surging into U.S. dollars.
Almost everywhere we look, an unsustainable bubble is forming. With interest rates at 0%, you have governments purchasing their own treasuries to suppress interest rates. Publicly-traded companies are repurchasing their own stock with borrowed money to enhance their earnings per share, which is all in itself speculation. With ultra-low interest rates, real estate has ballooned, and people are purchasing and buying homes again that they probably wouldn’t have been able to afford otherwise. All of the rising assets as a result have benefitted construction, retail spending, and all other areas in the economy that will suffer when the next credit bubble bursts.
According to Dent, there is $250 trillion in loans and financial securities around the world that is stimulating the economy artificially, which will de-leverage. He believes as much as $100 trillion out of the $250 trillion will vanish and be sucked out of the economy, crashing our markets worse than we saw in 2008.
This puts us in a place in between preparing for deflation and being ready for currency crises. One of the things that I have repeatedly said is that you are going to want to not be all in stocks, and that you should be cashing up for the opportunity to present itself. If, in fact, we do see assets collapse across the board, cash will be king because you will be able to purchase value, such as more precious metals, more stock, more real estate, and even be able to invest in your own private endeavors in an environment of low costs.
If I was absolutely certain as to how the future events will play out, I’d suggest being aggressive and go 100% in one specific thing, but the truth is it’s impossible to predict. This is why you should continue to be prudent with your investments, purchasing investments at great values and always making sure you aren’t overexposed to any one sector at any time.
Nicholas Green of FMTAdvisory.com has been spot-on with his analysis on the overall stock market, and he has been calling for a rebalancing in the Dow-to-Gold Ratio, which we are currently seeing. Being able to manage your money in this drastically changing economy is extremely important, and it’s something most people do a poor job of.
Don’t let this credit crunch take you down with it. Be prepared!